Oil back on defensive

Tropical Storm Debbie in the Gulf of Mexico looked much more threatening to oil and Nat Gas production on Friday which contributed to the short covering rally in both of these commodity classes. However, over the weekend the storm changed its path (as tropical storms often do) and is now on a path toward the east and away from the oil and Nat Gas rich producing region of the Gulf. TS Debbie is currently projected to remain a TS and make landfall around the Florida - Alabama border. At the moment this early tropical event is not going to have much if any impact on oil or Nat Gas production. Of note next week's inventory reports (July 5th) will likely show a reduction in oil imports due to LOOP closure and possibly a minor reduction in oil and gas production. However, it should still remain on the radar in the event that the path makes a sudden change west.

With TS Debbie moving into the background traders and investors are once again focused on the main headwinds that have been impacting oil and most all risk asset values for the last month or so. Many of the major events for the month of June have come and gone and overall they were all bearish for the risk asset markets. The last big event of the month will be the EU Ministers meeting on June 28/29 which so far is not providing any pre-meeting support for the markets even after the big four EU country leaders meet late last week and indicated they were leaning toward about $160 billion stimulus or growth program. A stimulus program aside the major issues facing the EU continues to be the evolving sovereign debt issues in Greece, Spain, Italy and other areas. Debt problems have been plaguing the EU for almost three years with many Minister's meetings already in the history books with no long lasting solution as the problems have actually intensified even more over time. The stage is set once again with Germany (the country with the most money and in the best condition in the EU) on the opposite side of the fence from the more socialist approaches set forth by France, Spain and Italy.

The way the markets are already trading today and with the euro now below another critical technical support level of 1.2550 traders and investors are currently placing a vote of no confidence that the EU leaders will be successful at the end of the week summit. In fact as it looks right now the euro is likely to retest the lows made on June 1 of around 1.23 and if solidly breached the next level of support is not until the 1.185 to 1.19 level made in the middle of 2010. Unless the 30 second news snippets hitting the media airwaves start to look like the EU leaders are on the cusp of a solution I would expect the 1.23 level to be tested this week. If the meeting turns out to be just another kicking of the can down the road outcome the June 2010 levels could be tested sooner than later.

What goes down must also come up. A falling euro will continue to support a rising US dollar as cash coming out of asset markets continue to flow to the US dollar. A rising US dollar should result in one major positive for the global economy...falling oil and commodity prices. As long as oil and commodity prices continue to drift lower the cost of doing business in the consuming world is also going down. Consumers around the world will eventually pay lower values for commodity based goods and services and should have more funds for paying down consumer debt, spending on non-discretionary items or simply increasing their savings. Eventually lower commodity prices should contribute to an improvement in the global GDP if values remain low for a extended period of time.

Also contributing to the overnight selling in the oil complex is an article over the weekend in the New York Times suggesting that much of the data out of China is likely overstated. I am not sure why this is a big revelation to the market as this has been a concern with data out of China and many emerging market countries for years. However, the main economic and energy growth engine of the world may be slowing even faster than the data is suggesting. If that is the case it is certainly another bearish data point for oil and the broader commodity complex. If China's oil demand growth is slowing it simply makes the global supply and demand balance even more biased to the oversupply side. Likely a contributing reason why the three main market crude...WTI, Brent and Dubai are all back in a contango.

Technically the spot WTI contract is struggling to get back above the $80/bbl level and is now in the third trading session in a row with the majority of trading taking place below $80/bbl. The next major level of technical support is around $75/bbl hit back in early October of 2011. Barring any major bullish turn of events the probability of testing that level is increasing. Brent has now been trading below its last support level of around $95/bbl for the last four trading sessions in a row. The next major support level for the spot Bent contract is in the $82 to $83/bbl area. Much like WTI barring any bullish news the likelihood of lower prices for both of these commodities from a technical perspective is increasing.

The big wild cards at the moment that could have an impact on the direction of oil prices that we all need to watch very closely is OPEC/Saudi Arabian production levels and action by the US Fed and other major central banks in cranking up the money printing presses. I am not certain that Saudi Arabia and some of its close allies within OPEC are going to be ready to cut production in the very short term. I still believe that one of the main reasons why the Saudi's are producing at the current high levels is to help the west to put pressure on Iran along with the sanctions placed by the west. With negotiations still continuing (technical meeting next week in Turkey) and the EU Iranian crude oil purchase embargo set to officially start on July 1 I view the lower price for oil as another contributor to keeping Iran at the negotiating table. I expect high OPEC/Saudi Arabian crude oil production levels to continue well into July...even if prices fall further from current levels.

The second variable out there is will the US Fed and/or other major central banks ramp up the printing presses and flood the world with a major quantitative easing program(s)? Certainly that would contribute to turning the current risk asset downtrend around...at least for a period of time. However, I do not see the US doing anything until the August Fed meeting in Jackson Hole at the earliest and that is only if the employment situation deteriorates further from current levels. The UK has continued to ease as has Japan and China. The place to watch is will China get even more aggressive and lower short term interest rates even further and/or actually announce a large stimulus program if in fact their economy is slowing even faster as alluded to in the NYT article. OPEC and quantitative easing remain on the radar as potential trend changers.

Over the last week the oil complex was lower with the complex losing between 4 to almost 7% with Brent leading the way lower. The August WTI contract decreased by about 5.42% or $4.57/bbl. The August Brent contract ended the week with a decrease of 6.79% or $6.63/bbl. The August Brent/WTI narrowed by about $2.06/bbl for the week as the normalization process slowly continues. The combination of the market looking at the Seaway Pipeline now pumping oil out of Cushing to the US Gulf Coast and the easing of the tensions in the Middle East is enough to keep the spread bulls on the sidelines going forward. Barring any change in the current geopolitics of the Middle East I still expect the spread to gradually continue to narrow over the next 3 to 6 months as the surplus in the US mid-west continues to recede. On the distillate fuel front the Nymex HO contract decreased by about 4.26% or $0.1128/gal on the week even as distillate fuel inventories increased modestly last week versus an expectations for a build in inventories. Gasoline prices decreased on the week after an expected build in gasoline stocks. The spot Nymex gasoline price decreased by 4.88% or $0.1318/gal this past week.

Nat Gas futures increased strongly on the week and closing above the trading range of $2.25 to $2.50/mmbtu. The July Nat Gas futures contract increased by 6.4% or $0.158/mmbtu on the week and is now trading around the key resistance area of $2.75/mmbtu.

With the first tropical weather pattern evolving in the greater Gulf of Mexico area the Nat Gas shorts were reminded of the exposure that could come with a storm. As such today's trading session was mostly about a short covering rally as the uncertainty that the weather pattern in the Gulf could turn into something that could eventually impact supply. This coupled with Thursday's bullish inventory report was enough to send the weak shorts to the sidelines. The current forecast from the National Hurricane Center expects this weather pattern to head east toward Florida and not into the oil and Nat Gas rich producing section of the Gulf of Mexico. It is just that time of the year when every potential tropical weather pattern will be looked at very closely by all market participants and those that form in the Gulf or head to the Gulf will generally have an impact on price as we saw today.

Technically the market is also breaking out to the upside and that has contributed to some new buying coming into the market. From a technical perspective the next upside target or resistance area would be a test of the $2.75/mmbtu high made a few weeks ago with support in the $2.50 to $2.55/mmbtu area. However, this is a market that is also impacted pretty strongly by what happens from the fundamental side of the equation with weather... both temperatures and tropics. At the moment I the current tropical weather pattern will not have any impact on short term supply as it does not look like this storm will hit the main part of the Gulf.

On the temperature front the mini heat wave that hit the Northeast will change over the weekend and a period of normal to below normal temperatures will be settling in. However, a major portion of the US will remain unseasonably hot which should result in some level of cooling demand on Nat Gas. However, I do not think the next several weeks will bring the same level of severely hot weather that was experienced last year and as such it could result in injections moving toward over performing history.

Most importantly the economics of coal to gas switching is becoming less favorable to Nat Gas on an almost daily basis. As of today the advantage has declined to around $0.08/mmbtu based on the Nymex spot Appalachian Coal price versus the Nymex spot Nat Gas futures price. Nat Gas is quickly approaching the point when utilities will start to look at the possibility of switching some of the Nat Gas back to coal for power generation if the current pattern continues as shown in the following chart. With Nat Gas inventories already at 73.3% of maximum workable capacity and the Producing region at 83.1% full the industry can't afford to lose any demand that has moved from the coal sector or else inventories will prematurely hit maximum capacity.

Bottom line I still view Nat Gas futures as limited to the upside and I do not expect a sustained rally above the current levels that will likely last for any length of time in the short to even medium term. As each week goes by the likelihood of hitting max capacity in inventory is increasing. I still expect the market to trade in a $2.25 to $2.50/$2.60 trading range for the foreseeable future with very short periods of time spent outside of the range on either end.

On the financial front equity markets around the world lost ground from the previous week. The financial markets were mostly impacted by all of the headwinds previously discussed. Global equity values decreased as shown in the EMI Global Equity Index table below back into positive territory for the year. The EMI Index decreased by 0.7% on the week and is now back in negative territory for the year by 0.7%. Over the last week the Index decreased in value in most all of bourses with five bourses still in negative territory for the year and the overall Index now at the lowest level since December of last year. The euro lost ground on the week while the US dollar increased modestly. Last week the global equity markets were a bearish price driver for oil and most commodity markets. Last week was a risk off trading week for most risk asset markets.

The oil complex has broken down below the trading range it has been in for weeks and is now bearish with more downside still possible. WTI can now be categorized as being in a $75 to $85/bbl trading range with Brent setting up in a $83 to $95/bbl range. The outcome of all of the upcoming events I have been discussing in the newsletter over the last several weeks have been mostly bearish for oil prices while the vast majority of the macroeconomic data that has been released is also bearish for oil. I am keeping my view at neutral to see if Nat Gas is able to hold onto the developing trading range. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.

Currently markets are mixed as shown in the following table.

Note: I am heading off to Europe for the next two weeks to teach several trading courses. As such my reports will be at non-normal hours and I may miss a few days. Dominick Best regards, Dominick A. Chirichella dchirichella@mailaec.com Follow my intraday comments on Twitter @dacenergy.

NO PURCHASE OR PAYMENT NECESSARY TO ENTER OR WIN. A PURCHASE OR PAYMENT WILL NOT INCREASE YOUR CHANCES OF WINNING. The Giveaway is sponsored by IBT Media Inc., 7 Hanover Square, 5th Floor, New York, NY 10004 (“Sponsor”). The Giveaway is void where prohibited or restricted by all applicable law, and all applicable federal, state and local laws and regulations apply. Winners are responsible for any taxes, customs, and duties and like amounts connected with the prizes.

1. ELIGIBILITY. The Giveaway is open only to legal residents of the 50 states of the United States and the District of Columbia who are the age of majority in their respective jurisdiction at the time of entry (19 in AL and NE and 18 in all other states). Sponsor and its advertising or promotion agencies, those involved in the production, development, implementation or handling of this Giveaway, any agents acting for, or on behalf of Sponsor, its respective affiliates, subsidiaries, licensees, service providers, and any other person or entity associated with this Giveaway are referred to as the “Giveaway Entities.” Employees, officers, and directors of the Giveaway Entities and members of their immediate families (spouses, children, siblings, parents and their spouses), and/or persons living in the same household as such persons, whether or not related, are ineligible to enter this Giveaway.

2. PROMOTION ENTRY PERIOD: The Giveaway begins on July 1, 2015 at 12:00 a.m. EST and ends at 11:59:59 p.m. September 31, 2015 (the “Giveaway Period”). When applicable, the Sponsor’s computers will be deemed the official time keeping devices for the Giveaway promotion.

3. HOW TO ENTER. You will receive one entry into the random drawing for the Giveaway Period when you provide a verified e-mail through our designated modal window interface. Limit one (1) entry per person/email address. Multiple entries will be disqualified. All previous winners of any giveaway or contest sponsored by IBT Media are not eligible to enter. Any effort by an entrant to misrepresent himself or herself through the use of aliases or multiple e-mail addresses will disqualify that entrant. Registrations generated by a script, macro or other automated means are void. You must be the rightful owner of the email address provided. In the event of a dispute as to the identity of the winner, the winner will be deemed to be the authorized account holder of the email address provided at the time of entry. Entrants must provide all information requested to be eligible to win. Incomplete or unintelligible entries, in the sole discretion of Sponsor, will be disqualified. Sponsor will not verify receipt of entries and assumes no responsibility for late, lost, damaged, misidentified or misdirected entries.

4. PRIZE DRAWINGS AND NOTIFICATION OF CHOSEN ENTRANTS. A random drawing will be conducted by Sponsor on or about the first week following the Giveaway Period from among all eligible entries received to award one prize (described below). Selected entrants will be notified by email and will be required to respond (as directed) to the e-mail notification within 72 hours of attempted notification. Failure to respond timely to the notification may result in forfeiture of the prize. Selected entrants may also be required to complete an affidavit of eligibility and liability / publicity release (except where such a requirement is prohibited by law). If the completed Release is not returned within the time specified, the prize may be forfeited.

One (1) Prize per Giveaway Period: An Apple Watch Sport™, which is a registered trademark of Apple Inc. Approximate Retail Value: $349. Limit one (1) prize per person/household. No substitution, transfer, or cash equivalent for any prize, except that Sponsor, at its sole discretion, may substitute a prize with a prize of equal value, due to unavailability of advertised prize. Each prize will be awarded provided each prize is properly claimed. The prize will be shipped by Sponsor to the winners within 1-5 weeks of the receipt of a signed affidavit for approved entries. Prize winners are responsible for all taxes and fees related to any prize received. Actual retail value of prizes may vary due to market conditions. The difference in value of prize as stated herein and value at time of prize notification, if any, will not be awarded.

5. ODDS. The odds of winning a prize will depend on the number of eligible entries received for the Giveaway Period.

6. MARKETING AND PRIVACY. Information collected in connection with entries received for this Giveaway will be used for marketing purposes. By entering the Giveaway, entrants consent to receive marketing emails with updates, offers and promotions from Sponsor or third parties. Entrants may follow instructions contained in each subsequent email communication to opt-out of receiving future email communications, however, Sponsor may still use the email address provided to notify entrant if they have been selected as a winner of this Giveaway.

7. CONDITIONS FOR PARTICIPATION. Giveaway is subject to these Official Rules. By participating, entrants agree to be bound by these complete Official Rules. All decisions of Sponsor are final and binding; and entrants agree to waive any right to claim ambiguity in the Giveaway or these Official Rules, except where prohibited by law. In addition, each entrant represents and warrants that all information contained in his/her registration entry is true and accurate. By accepting a prize, winners agree to release, defend, indemnify and hold harmless the Sponsor, its attorneys, affiliates, together with the respective directors, employees, officers, licensees, licensors and agents of each, including without limitation, their respective advertising and promotion entities and any person or entity associated with the production, judging, or administration of the Giveaway (collectively, the “Releasees”) from any and all loss, damage, injury, death, or other liability, either at law or equity, whether known or unknown, asserted or non-asserted, arising from or in connection with awarding, receipt and/or use or misuse of prize or participation in the Giveaway. This Promotion shall be governed by, and construed in accordance with, the laws of the State of New York, regardless of conflicts of laws principles. Any action or litigation concerning this Promotion shall take place exclusively in the federal or state courts sitting in New York County, New York, and each entrant expressly and irrevocably consents to the jurisdiction of and venue in such courts and waives all defenses of lack of jurisdiction and inconvenient forum with respect to such courts. Each entrant agrees to service of process by mail or other method acceptable under the laws of the State of New York. ANY CLAIMS, JUDGMENTS AND/OR AWARDS SHALL BE LIMITED TO ACTUAL OUT-OF-POCKET COSTS ASSOCIATED WITH ENTERING THIS PROMOTION. REGISTERED CONTESTANT HEREBY WAIVES ANY RIGHTS OR CLAIMS TO ATTORNEY'S FEES, INDIRECT, SPECIAL, PUNITIVE, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ENTRANT, WHETHER FORESEEABLE OR NOT AND WHETHER BASED ON NEGLIGENCE OR OTHERWISE. EACH PARTY EXPRESSLY WAIVES ANY RIGHT TO A JURY. The releases hereunder are intended to apply to all claims not known or suspected to exist with the intent of waiving the effect of laws requiring the intent to release future unknown claims. This Giveaway is void outside the U.S. and where prohibited or restricted by law, and subject to applicable federal, state, and local laws. Sponsor reserves the right to disqualify any entrant it finds to be tampering with the entry process or the operation of the Giveaway or violating these Official Rules.

8. PUBLICITY AND RELEASE FORMS: Sponsor reserves the right to use the Giveaway for publicity purposes in any media, and to use the name, likeness, and hometown name and/or prize information of prize winners as part of that publicity, without any compensation or prior review, unless prohibited by law. Each prize winner will be required to submit a declaration and a liability/publicity release and confirmation that the prize winner has followed the rules of the Giveaway, in the form supplied by Sponsor (the "Declaration and Release"), and signed by the prize winner. The Declaration and Release must be signed and returned within seven (7) days of notification. Prize won by an eligible entrant who is a minor in his/her state of residence will be awarded to minor's parent or legal guardian who must sign and return all required documents. In the event the Affidavit and Release is not returned within this period, an alternate winner may be selected for such prize. Any prize notification or prize returned to Sponsor as undeliverable will result in the awarding of that prize to an alternate winner (who will be required to comply with similar procedures).

9. LIMITATION OF LIABILITIES: The Releasees shall not be liable for: (i) late, lost, delayed, stolen, misdirected, incomplete unreadable, inaccurate, garbled or unintelligible entries, communications or affidavits, regardless of the method of transmission; (ii) telephone system, telephone or computer hardware, software or other technical or computer malfunctions, lost connections, disconnections, delays or transmission errors; (iii) data corruption, theft, destruction, unauthorized access to or alteration of entry or other materials; (iv) any injuries, losses or damages of any kind caused by the prize or resulting from acceptance, possession or use of a prize, or from participation in the Giveaway; or (v) any printing, typographical, administrative or technological errors in any materials associated with the Giveaway. In the event that more prize notice emails are sent for any of the prizes than the number of prizes available as specified in these Official Rules, a random drawing will be conducted from all entrants who received such notices to award number of prizes specified in these Official Rules. Sponsor disclaims any liability for damage to any computer system resulting from participating in, or accessing or downloading information in connection with this Giveaway, and reserve the right, in their sole discretion, to cancel, modify or suspend the Giveaway should a virus, bug, fraud, computer problem, unauthorized intervention or other causes beyond Sponsor’s control, corrupt the administration, security or proper play of the Giveaway. Sponsor may prohibit an entrant from participating in the Giveaway or winning a prize if, in its sole discretion, it determines such entrant is attempting to undermine the legitimate operation of the Giveaway in any way by cheating, hacking, deception, or any other unfair playing practices of intending to annoy, abuse, threaten or harass any other players or Sponsor representatives. Use of any automated system to participate is strictly prohibited and will result in disqualification. Sponsor may disqualify at its sole discretion any entries it believes are created by an automated system or exceed the maximum of one entry per natural person/email address. Disputes regarding these Official Rules and/or this Giveaway will be governed by the internal laws of the State of New York, without regard to conflicts of laws principles. Any and all legal actions or claims arising in connection with this Giveaway must be brought in a court of competent jurisdiction within New York County, New York or, at Sponsor’s sole discretion, anywhere else in the United States. CAUTION: ANY ATTEMPT TO DELIBERATELY DAMAGE THE IBT MODAL WINDOW OR UNDERMINE THE LEGITIMATE OPERATION OF THE GIVEAWAY MAY BE IN VIOLATION OF CRIMINAL AND CIVIL LAWS AND WILL RESULT IN DISQUALIFICATION FROM PARTICIPATION IN THE GIVEAWAY. SHOULD SUCH AN ATTEMPT BE MADE, SPONSORS RESERVE THE RIGHT TO SEEK REMEDIES AND DAMAGES (INCLUDING ATTORNEY FEES) TO THE FULLEST EXTENT OF THE LAW, INCLUDING CRIMINAL PROSECUTION.

10. PRIVACY. Please refer to Sponsor’s privacy policy located at http://www.ibtimes.com/corporate/privacy for important information regarding the collection, use and disclosure of personal information by Sponsor.

11. WINNER LIST. For names of the winners, send your request in a self-addressed, stamped envelope to: The IBT Media Email Address Monthly Giveaway Winners List, 7 Hanover Square, 5th Floor, New York, NY 10004. Winner lists will be sent out once winners have been verified. The name of the all winners will be posted only for 30 days after the end of the Entry Period.

BY ENTERING, YOU AGREE THAT YOU HAVE READ AND ACCEPTED ALL OF THESE GIVEAWAY RULES.